The Cross Section of Expected Holding Period Returns and Their Dynamics: A Present Value Approach

57 Pages Posted: 2 Dec 2012 Last revised: 20 Jun 2014

See all articles by Matthew R. Lyle

Matthew R. Lyle

Goizueta Business School

Charles C. Y. Wang

Harvard Business School (HBS); European Corporate Governance Institute (ECGI)

Date Written: June 19, 2014


We provide a tractable model of firm-level expected holding period returns using two firm fundamentals ― book-to-market ratio and ROE ― and study the cross-sectional properties of the model-implied expected returns. We find that: 1) firm level expected returns and expected profitability are time-varying, but highly persistent; 2) forecasts of holding period returns strongly predict the cross section of future returns up to three years ahead. We document a highly significant predictive pooled regression slope for future quarterly returns of 0.86, whereas the popular factor-based expected return models have either an insignificant or a significantly negative association with future returns. In supplemental analyses, we show that these forecasts are also informative of the time-series variation in aggregate conditions: 1) for a representative firm, the slope of the conditional expected return curve is more positive in good times, when expected short-run returns are relatively low; 2) the model-implied forecaster of aggregate returns exhibits modest predictive ability. Collectively, we provide a simple, theoretically-motivated, and practically useful approach to estimating multi-period ahead expected returns.

Keywords: Expected returns, discount rates, holding period returns, fundamental valuation, present value

JEL Classification: G12, G17, G10

Suggested Citation

Lyle, Matthew R. and Wang, Charles C. Y., The Cross Section of Expected Holding Period Returns and Their Dynamics: A Present Value Approach (June 19, 2014). Journal of Financial Economics (JFE), Forthcoming, Harvard Business School Accounting & Management Unit Working Paper No. 13-050, Rotman School of Management Working Paper No. 2182628, Available at SSRN: or

Matthew R. Lyle (Contact Author)

Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Charles C. Y. Wang

Harvard Business School (HBS) ( email )

Soldiers Field
Boston, MA 02163
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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